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An analyst believes that inflation is going to increase by 3.0% over the next year, while the man be unchanged. The analyst uThe SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the the slope of tREQUIRED RATE OF RETURN (Percent) 20.0 Return on HCs Stock 0.0 0.5 1.0 1.5 1.5 2.0 RISK (Beta) CAPM Elements Value Risk-free

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Answer #1

rate positively ..

ans 1
Based on graph -
risk free rate = 2%
Market risk premium = 6.00% =(8%-2%)/1
Stock beta = 1
required rate = 8.0%
ans 2
New required rate of return
infation will effect risk free rate, market risk premium will remain same
therefore required rate =
=3%+2%+(6%*1)
11.00%
Therefore answer = 11.00%
ans 3
Higher the level of risk aversion STEEPER the solpe of the SML, the
ans 4 Correct statement is : high beta stock
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